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28 Jun 2004
MOODY'S AFFIRMS RATINGS OF NATIONAL GRID TRANSCO AT Baa1 / PRIME-2 AFTER ANNOUNCEMENT OF UK TOWERS BUSINESS ACQUISITION
London, 28 June 2004 -- Moody's Investors Service today affirmed National Grid Transco's
Baa1 long term rating, and Prime-2 short term rating,
following the company's announcement that it had agreed to acquire
the UK transmission tower infrastructure business from Crown Castle UK
Limited ('CCUK') for approximately GBP 1.1 billion.
Moody's also affirmed all ratings of the National Grid Transco group,
including the A2 long term and Prime-1 short term ratings of both
National Grid Company Plc (NGC) and Transco Plc, as well as the
A3 long term rating on Transco Holdings Plc.
The primary business of CCUK is the operation of analogue and digital
television and radio broadcast transmission networks, and the leasing
of tower space to wireless carriers through the c. 3,500
communications sites that it owns, leases or manages in the United
Moody's decision to leave the ratings of National Grid Transco (NGT)
unchanged is underpinned by the fact that the higher risk business profile
of the acquired business is largely mitigated by the sustained dominance
of NGT's regulated gas and electricity network portfolio,
which remains by far the core business of the Group. NGT is acquiring
higher risk, mostly non-regulated EBITDA, but this
is expected to comprise less than 5% of the total, post acquisition,
group EBITDA, with the remainder being principally generated from
regulated utility activities in the UK and the US. Moody's
also notes that the ratings on NGT's regulated operating companies
- Transco Plc, Transco Holdings Plc and NGC - are
supported by the expectation that the newly acquired business is able
to generate sufficient free cash flow to cover the costs of any additional
holding company debt at NGT raised to finance the acquisition.
Therefore, Moody's does not anticipate additional debt-servicing
burden on the UK operating companies.
Moody's believes that the addition of CCUK's towers business
to the NGT group will slightly increase the business risk of NGT's
overall portfolio mix. However, the newly acquired business
will be relatively small in the context of the group's more stable
Moody's acknowledges that the acquisition is in line with NGT's
stated strategy of developing its network infrastructure businesses,
and that the expansion of the group's existing telecoms infrastructure
business (Gridcom and NEESCom) may benefit from its expertise as an efficient
network operator. The credit strengths of the acquired business
are supported by recurring revenues, long leases and generally low
fixed costs and capital expenditure requirements. Around half of
the existing business of CCUK Ltd is regulated and the other half is under
long term contracts, principally with blue chip companies.
Churn rates have been historically low, facilitated largely by prohibitive
costs of removing antenna equipment and the importance of delivering uninterrupted
transmissions to customers. The business is also likely to benefit
over time from wireless network operators' growing demand from 2G
and 3G deployment.
In contrast thereto, however, credit weaknesses include CCUK's
exposure to the volatile wireless industry and its high concentration
of large single customers, comprising predominantly of the British
Broadcasting Corporation (BBC) and the large wireless network operators.
In Moody's view, the wireless telecommunication industry is
competitive and CCUK faces competition for tenants from other large independent
tower owners, towers owned by the wireless network operators themselves,
and alternative facilities such as rooftops and utilities poles.
The business is also inherent with substantial technology risks,
although the towers and sites element of the business does not own,
and therefore does not suffer technology risk on, the antennas,
base station or microwave equipment installed on its towers. Finally,
Moody's also notes the potential long-term risk from contingent
decommissioning costs of retired infrastructure.
Moody's expects the impact of the acquisition on NGT's financial
profile to be moderate and commensurate with the group's existing
credit profile, which includes some financial flexibility.
While the group retains some flexibility for further debt-funded
growth, Moody's analysis of NGT ratings focuses on the ready availability
of operating cash flows -- both existing and newly acquired -
to service NGT debt.
Headquartered in London, England, National Grid Transco Plc
is the holding company for a range of international businesses focusing
on the ownership and operation of electricity and gas networks.
Its two principal geographic areas of activity are the UK and the US.
Transco Plc, a wholly owned subsidiary of Transco Holdings Plc,
owns and operates the GB natural gas transmission and distribution network.
Transco Holdings Plc is a wholly owned indirect subsidiary of NGT.
National Grid Company Plc, a wholly owned indirect subsidiary of
NGT, owns and operates the high-voltage electricity transmission
system in England and Wales.
Philipp L. Lotter
Asst Vice President - Analyst
Moody's Investors Service Ltd.
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